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Working with weighted average cost of capital.

Given the following information for Acme Corporation, find the weighted average cost of capital. Assume the company's tax rate is 35%.

Debt: 10,000 9 percent coupon bonds outstanding, $1,000 par value, 12 years to maturity, selling for 103 percent of par; the bonds make annual payments.

Common stock: 100,000 shares outstanding, selling for $65 per share; beta is .95.

Preferred stock: 15,000 shares of 7.5% preferred stock outstanding, currently selling for $80 per share.

Market: 7 percent market risk premium and 5 percent risk-free rate.

Solution Preview

Just in case you didn't know, I thought I'd first provide a little background on Weighted Average Cost of Capital (WACC). WACC is defined as the opportunity cost of capital for the firm's existing assets. WACC is a way of estimating the opportunity cost of capital.
<br>There are three steps in calculating the weighted average:
<br>Step 1. Calculate the value of each security as a proportion of the firm's value. Firm ...

Solution Summary

This solution is comprised of a simple explanation of how to calculate the weighted average cost of capital. Supplemented with more than 200 words of text, this step-by-step explanation of this fundamental staple of finance provides students with a clear perspective of the weighted average cost of capital.